A SIPP, or self-invested personal pension, works similar to a standard personal pension, with one key difference; a SIPP will allow you to both pick and manage your pension’s investments.
A personal pension is a great way to ensure your financial stability after retirement and can provide you with a good quality of life and financial comfortable throughout your later years.
When considering a self-invested personal pension, it is important to know exactly what they consist of, how they are managed, and further how they will help you during retirement. Through this guide, Forces Compare will be taking a look at exactly what a SIPP is, how it works and whether this is the right scheme for your retirement plans.
A SIPP works is a type of private pension that allows you to invest in whatever products or investments you would like to. The firm will hold investments until the date of your retirement and releases funds in the form of a retirement income. A SIPP is different from the standard personal pension scheme in the fact that it gives you more control over your investments.
With a standard personal pension, the investments made are managed by the pooled fund of your choice and you do not get to pick your investments or manage them in any way.
However, with a self-invested personal pension scheme, you have control over what investments are made within your pension, whilst also managing these investments – hence the name ‘self-invested personal pension’ or SIPP.
These types of schemes are often ‘execution only’ meaning the firm where you keep your SIPP will make the investments for you that you have chosen, but not give advice. It therefore appeals to people who are a bit more investment savvy and have researched into different funds and investments, but you take responsibility for any losses incurred.
Like a normal pension scheme, you will receive income tax relief according to your pay bracket and when you take out the money from the age of 55 upwards, you will usually get up to 25% tax free and any additional earnings are taxed as income.
Low cost SIPPS – This is where you get no advice from the firm you are dealing with (and therefore have full control). The firm will simply transfer the money towards your investments and allocate the payments and returns on your behalf. You can usually start with as little as £5,000 but it is recommended to have an existing pension fund of around £50,000 and to be able to contribute several thousands of pounds per year.
Full SIPPs – This offer much wider investments, including commercial property – and will often come with a team of advisors to assist you.
The investments to choose from will be entirely dependent upon the type of self-invested personal pension plan you go for, in addition to the specified provider who offers it.
SIPPs are great for those who have previous experience in investing. You should always consider the types of skills you will need to execute investments properly, and whether you are capable of both achieving and managing this.
If you are currently worked and classified as an ‘earner,’ you can contribute 100% of your annual income before tax up to a limit of £40,000 (as of 2019/20).If you are not working and classified as a ‘non-earner,’ you can pay up to £3,600 per tax year and still get basic-rate rate relief. This equals to paying in £2,880 per tax year of which 20% will be taxed at £720.
The fees for using SIPPs are typically higher than other pensions and there are many fees to look out for with each firm or platform including:
You should consider getting a SIPP if you know how to invest and manage your investments long-term. If you still feel like a SIPP is the best option for your retirement plans, you can employ an investment manager to manage these investments for you.
SIPPs typically come with higher charges than other type of personal pension schemes. Therefore, it’s usually best to only consider this type of plan when you have a large fund or are experienced at investing money.